Hitting Argentina for Oil Seizure Can Hurt U.S. Interests

May 4 (Bloomberg) -- Argentina’s Lower House voted on
Thursday to approve the expropriation of 51 percent of YPF SA,
the country’s largest oil company. Expect more international
outrage in weeks to come, when President Cristina Fernandez de
Kirchner announces how little she plans to pay Spain’s Repsol
YPF SA, the previous owner, for its stake, which it values at
more than $10 billion.

Then take a deep breath and move on, because most efforts
by other nations to punish Argentina promise to be ineffectual
and counterproductive. That’s a job best left to the markets.

The YPF takeover is just the latest snook that Argentina
has cocked at investors, creditors and policy makers around the
globe: In 2007, Fernandez’s predecessor (and husband) Nestor
Kirchner began skewing the country’s official inflation rate,
prompting censure by the International Monetary Fund. In 2008,
Fernandez nationalized $24 billion of private pension funds. In
2009, she did the same to Aerolineas Argentinas SA.

In 2010, Fernandez forced out the central bank’s governor
and began tapping its reserves to pay off debt. Yet Argentina
still owes the members of the Paris Club $9 billion from its
infamous 2001 default, has not settled with several private debt
holders, and has more cases pending with the International
Center for Settlement of Investment Disputes than any other
nation.

High Dudgeon

Argentina’s trading partners and investors have responded
to its wayward behavior with high dudgeon. Spain has threatened
to cut imports of Argentinian biofuels. The European Union has
delayed economic talks. The IMF has closed its office in Buenos
Aires and given Argentina until September to rectify its
statistics on inflation and gross domestic product. The U.S.
announced in September it would vote against multilateral loans
for Argentina until further notice, and last month it revoked
trade preferences for Argentina because of its failure to pay
arbitration awards to two U.S. companies.

Fernandez, however, has Argentine public opinion on her
side. Her takeover of YPF was backed by more than 60 percent of
those polled. Mixing high drama with low politics, she has
repeatedly wrong-footed her weak and disorganized domestic
opponents and successfully played on public resentment over the
rushed privatizations of the 1990s (which included Aerolineas
and the pension funds) and the huge privations that followed
after the 2001 default.

Moreover, thanks partly to a commodity boom, Fernandez has
kept Argentina’s economy growing and unemployment low, even as
she has manipulated economic policies. She has demonstrated time
and again that she doesn’t care what the outside world thinks.

That doesn’t mean Argentina should be allowed to violate
international agreements and obligations with impunity. Members
of the World Trade Organization should vigorously pursue their
complaints about Argentina’s rising wall of import restrictions.
The IMF and its members should push Argentina to bring its
statistics up to snuff. Companies and their national governments
should keep the pressure on Argentina to make good on damages
that have been awarded.

But if such pressure is not carefully targeted, it can
backfire. Consider the U.S. decision to vote against almost all
multilateral loans for Argentina. The U.S. lacks the clout to
make the ban stick -- at the Inter-American Development Bank,
for example, no other country has followed its lead. To the
extent that the move sends a signal, it is an unfortunate one:
the familiar heavy hand of Uncle Sam, albeit one now holding a
rather diminished stick. Moreover, some of these loans -- like
one approved last November to buttress Argentina’s finance
ministry -- are intended to strengthen the administrative sinews
of Argentina’s public sector, whose weakness has been exploited
by Fernandez. The U.S. should reconsider what seems a largely
self-defeating strategy.

Argentine Borgia

The U.S. should also keep in mind that Fernandez’s
political maneuvers have more in common with the Borgias than
with Fidel Castro of Cuba or Hugo Chavez of Venezuela. In 1993,
she and her husband supported YPF’s privatization. Now she has
reversed it. At the same time, she’s also soliciting offers from
foreign oil companies to operate some of YPF’s fields. She would
doubtless welcome foreign investors willing to develop
Argentina’s shale gas reserves -- and, given that they are the
world’s third largest, inevitably they will come, regardless of
Repsol’s unhappy experience and whatever outlandish terms she
sets.

Eventually, her misguided economic policies may cause her
government’s undoing. Argentina’s refusal to settle with its
holdout creditors has cut it off from global credit markets, and
left it reliant on increasingly dubious mechanisms to service
its rescheduled debts. Foreign investment is shrinking. Capital
flight is growing. Subsidies on utilities and transportation are
increasing government deficits, and caps on rates have made it
less profitable for energy companies to invest. Private
economists put Argentina’s inflation at more than double the
government’s stated figure of around 9 percent.

Rather than play the role of outside oppressor in
Fernandez’s well-scripted narrative, the U.S. and other
countries should let Argentina’s house of cards collapse of its
own accord. Don’t restrict visas for Argentinian officials or
try to throw it out of the Group of 20, as some have recommended;
instead, rely on countries like Mexico and Brazil to apply
suasion at June’s G-20 meeting, and otherwise do what can be
done to strengthen Argentina’s democratic institutions.

From regional power politics and United Nations
peacekeeping to nonproliferation, the U.S. has interests with
Argentina that go beyond just collecting unpaid bills. The best
way to advance them is to take the high road and the long view.

Read more opinion online from Bloomberg View.

Today’s highlights: the View editors on poor corporate
governance at tech companies; Michael Kinsley on Mitt Romney’s
former spokesman; Virginia Postrel on the economic folly of
recycling eyeglasses; Susan Antilla on mandatory arbitration;
and Jonathan Cohn and David Strauss on making health-care reform
work.